Credit cards are used for a number of financial purposes ranging from paying your bills on time to spreading the bills over equated monthly installments (EMIs) or for consolidating multiple accounts into one. In addition to all this, you can also use a credit card for debt consolidation. What it essentially means is that you can use your credit card to repay your current loan(s).
Let’s understand how this works. Suppose Mr ₹2 lakh that he has to pay back, and then there is a personal loan of that ₹1 lakh which he took six months ago and will continue for another year.
What Mr. ₹3 lakhs.
But why would he do this? There are a number of advantages: First, he only has to handle one loan instead of two or more loans across categories. It is easier to keep an eye on one EMI payment deadline every month rather than two or more deadlines for different loans. Second, debt consolidation is seen as a repayment of old debts. This helps your credit score go up.
However, before using your credit card for debt consolidation, keep the following points in mind:
Follow these points before consolidating your debts:
I. Credit utilization ratio: The ideal credit utilization ratio for a credit card is 30 percent. So, at the time of debt consolidation, make sure that you do not exceed the optimal full credit limit. While there is no rule of thumb that will stop you from doing this, you will take a hit on your credit score if you choose to do so.
II. Balance transfer: Sometimes credit cards offer promotional balance transfer rates, which allow the card users to transfer debt from cards with a higher interest rate to a new card with a lower interest rate. This can help lower interest costs and make it easier to pay off your debts.
III. Debt repayment: By consolidating your debts on one card, you simplify your payments. However, it is crucial to pay off the balance before the promotional period ends as interest rates may increase afterwards.
IV. Various publications: Be aware of the potential fees associated with balance transfers and make sure you don’t add new debt to the original cards as this could worsen your financial situation.
There are a number of other consolidation methods, including personal loans, depending on your circumstances. It is therefore advisable to evaluate your financial situation and consider seeking advice from a wealth advisor.
